Should a retrenchment package received while out of RSA be exempt from tax?

Q: I would like
to find out how the taxpayer should be taxed on foreign employment income if:

He is a SA resident, he worked for an SA company in Namibia.
The SA company has a branch in Namibia so they have sent him to do some
project. He last worked in the SA offices in 2011.

For the 2014 year of assessment he worked for this SA
company for 60 days, then he was retrenched because he was done with his
projects and the SA company did not have any projects available for him to do
in Namibia so they gave him his salary and a retrenchment package (a gratuity).

He then found another job in Namibia (from a Namibian company)
and worked there for the remaining days in the year of assessment. His salary
will be exempt.

The taxpayer can prove that he was outside the SA for more
than 183 days and 60 continuous period.

The SA company did not withhold PAYE on the taxpayer’s other
income except for the gratuity, but they recorded in the taxpayer’s IRP5 that
he received a taxable income, and now the taxpayer has a huge liability.

I have requested the employer to correct the taxpayer’s IRP5
and record his income as ‘foreign income – non-taxable’. And the employer has
corrected foreign income as non-taxable but the issue now is that they are
refusing to correct gratuities and other allowances to be foreign but
non-taxable.

They are saying the gratuity the taxpayer received was a
retrenchment package and it should be taxable. And I am asking why they
withhold so little tax on that gratuity? And all his income should be exempt,
because section 10(1)(0)ii says: "any
amount received by or accrued to any
employee during any year of assessment by way
of any salary, leave pay, wage, over time, bonus, gratuity, commission,
fee, emolument or allowance, including
any amount referred to in
paragraph (i) of the definition of gross
income in section 1 or any amount
referred to in s8, 8B or 8C in respect of services rendered outside
the Republic by that
employee for or on behalf of any employer, if that employee was
outside the republic-

(a) for a period or
periods exceeding 1863 full days in aggregate during any period
of 12 months

(b) for a continuous
period exceeding 60 full days in aggregate
during any period of 12 months”

And I am saying that if the remuneration can be exempt and
taxable so as the gratuities because they fall under the definition of remuneration
(Fourth Schedule).

A: In terms of
article 15 of the RSA /Namibia treaty, Namibia obtains the right to tax
"salaries, wages and other similar remuneration” after an "aggregate 183 days
in any twelve-month period commencing or ending in the year of assessment
concerned”. This is so irrespective of
whether or not the remuneration is borne by a permanent establishment or a
fixed base which the RSA employer has in Namibia. The RSA provides the section
10(1)(o)(ii) exemption to address the double tax that arises if the person is
still a resident of the RSA (ordinarily resident).

The issue is whether or not the ‘gratuity’ qualifies. Section 10(1)(o)(ii) refers to ‘remuneration’
and not ‘remuneration as defined in paragraph 1 of the Fourth Schedule’ (as
does for instance sub-paragraph (i) and (iA)).
The section does, however, include a ‘gratuity’.

The practice prevailing (see Interpretation note 16) is that
"the services that generated the income to be considered for exemption must
have been rendered during the 183 day and 60 day periods…” It is possible that the gratuity is based on
services rendered in the RSA and the exemption would only be available to the
extent that the gratuity relates to the services rendered outside the RSA. We don’t know if that applies and the client
will have to confirm that from the employer.

Q2: His IRP5
states that it’s a foreign gratuity, which means that it is a gratuity for the
services he rendered outside SA. I have asked the employer and she said:

"The gratuity (retrenchment package) was for compensation
for loss of employment upon his return to South Africa.

According to me, and to our Financial Controller, the
retrenchment package was paid because the taxpayer would be returning to South
Africa, and we didn’t have another project to place him on. As such, the
retrenchment package was paid as local income, and not as foreign income. The
reason it is marked on the IRP5 as 3951, is because the payroll he was paid out
of is flagged as a foreign payroll, and rather than transfer him to a local
payroll just to pay his package, we did it from the regular expat payroll. As
such, we do not agree that the retrenchment package could/should be classified
as exempt foreign income, and this was also why a tax directive was obtained,
rather than just paying it out as exempt of tax.”

A2: As we
indicated in our previous response the practice prevailing (see Interpretation
note 16) is that "the services that generated the income to be considered for
exemption must have been rendered during the 183 day and 60 day periods…” The
fact that the employer marked the gratuity as foreign is irrelevant. The determining factor is where the services
were rendered that was used to calculate the retrenchment package. By example, if the person worked for 10 years
of which 2 years were outside the RSA and the retrenchment was calculated with
reference to the full 10 years the full amount can’t be exempt. The view of the financial controller seems
the correct one.

As the taxpayer bears the onus of proof in this instance he
will have to prove that the retrenchment gratuity was paid in respect of the
service rendered in Namibia. If not the
full amount will not qualify the exemption.

Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.

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